Lumentum Holdings Inc. (LITE) Q1 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Lumentum Q1 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would like to introduce your host for today's conference Mr. Chris Coldren, Vice President of Strategy and Corporate Development. Sir, you may begin.

Thank you, Vince. Welcome to Lumentum’s first quarter fiscal 2017 earnings call. This is Chris Coldren, Vice President of Strategy and Corporate Development. Joining me on today’s call are Alan Lowe, President and Chief Executive Officer; and Aaron Tachibana, Chief Financial Officer. This call will include forward-looking statements, including statements regarding Lumentum’s expected financial performance, expenses, trends, and positions in our markets, as well as expectations related to our customers and our products. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations. We encourage you to review our most recent filings with the SEC, particularly the risk factors described in our 10-K filing for fiscal year ended July 2nd, 2016. The forward-looking statements we provide during this call, including projections for future performance are based on our reasonable beliefs and expectations as of today. Lumentum undertakes no obligation to update these statements except as required by applicable law. Please also note unless otherwise stated, all results and projections are non-GAAP. Non-GAAP financials should not be considered as a substitute for, or superior to, financials prepared in accordance with GAAP. Our press release with our first quarter fiscal 2017 results is available on our website, www.lumentum.com, under the Investor section and includes additional details about our non-GAAP financial measures and reconciliation between our GAAP and non-GAAP results. Our website also has our latest SEC filings, which we encourage you to review and supplementary slides relating to today’s earnings release. Finally, a recording of today’s call will be available by 7.30 PM Pacific Time this evening on our website. Now, I would like to turn the call over to Alan for his comments and first quarter business highlights.

Thank you, Chris. Demand continues to be relentless. I'm pleased to have achieved both record revenues and operating margins for the first quarter. Strength in demand for ROADMs, 100G components, fiber lasers and submarine product combined with capacity additions drove our first quarter revenues up 7% sequentially and 21% relative to a year ago. Telecom growth was strong, increasing 14% sequentially and 25% year-on-year. Despite the increased output, our customers wanted more. At Lumentum we're focused on using our photonic technology to accelerate the speed and scale of cloud, networking, and advanced manufacturing, and next-generation 3D sensing application. Each of these applications are currently going through or planning transition, which create strong demand for our products. Rapid growth in cloud computing, streaming video, mobile, and other high-bandwidth applications is placing enormous demand on networks in terms of capacity, connectivity, and efficiency. These demands can only be met with advanced optical commutation technology, 100G and higher data transmission and advanced ROADMs architectures. Advance manufacturing technique including the cutting and welding of metals, precision machining of semiconductor wafers in circuit board and glass and plastic displays are driving further reliance on lasers. Leaders in next-generation consumer electronics, virtual and augmented reality as well as the automotive industry are looking to laser-based 3D sensing to enhance capabilities and enable new applications. We continue to invest in these new emerging applications to position us well with these various customers. Lumentum is a leader in photonics technology that are critical enablers of these applications. And our investments in new products position us well for all of these future trends. Demand from China continues to be strong and new network tenders are being awarded for additional network build out throughout calendar 2017. North America metro network performance of transition from trials to large city buildouts. Hyperscale data center operators continue to plan major 100G upgrades and we believe that we’re well positioned as the transition from 40G to 100G accelerates. Increasingly, network and datacenter operators around the world are critically dependent upon our products. Well, we have added significant manufacturing capacity over the past years; we continue to be capacity limited across many of our product lines. We continue to experience challenges with some of our suppliers meeting our demand which is also affecting our availability to meet our customer’s demand. Telecomm strength was driven by strong growth in our ROADM products and transmission components including tunable lasers and modulators for 100G systems. Additionally, we saw a return to strength in our submarine business as we have predicted. ROADM revenue grew 17% quarter-on-quarter and 97% year-over-year driven by strong demand of great level TrueFlex products. ROADMs are not only critical to North America metro builds that are underway but most network operators around the world are shifting to more dense architectures that rely on the functionality of our TrueFlex ROADM products. Based on engagements with customers and network operators in China, we continue to expect that China will begin significant ROADM deployments in the next calendar year. Datacom revenue dwell up 24% year-on-year declined 6% sequentially driven by decline in our 100G transitioning [ph] revenue. Demand for our 100G Datacom products [indiscernible] continues to be extremely strong, but during Q1 we encountered a quality problem within electronic component that we sourced externally. The supplier quality issue negatively impacted our ability to meet our customer’s demand and impacted our first quarter revenue by approximately $10 million. The supplier has implemented corrective actions to rectify the issue. We have recently resumed shipments of 100G products that were affected by the supplier problem and we are again ramping to meet our strong customer demand. For lower speed Datacom products, we actually saw an increase in 40G revenue. However, we continue to see strong pricing pressure with price aggressors in the market focused on maintaining market share. Commercial laser’s revenue was up 12% year-over-year, but declined 2% sequentially. Kilowatt fiber laser revenue was up 15% sequentially to new record levels but offsetting this for declines in laser products. This is a very exciting time for us. Demand continues to grow for bandwidth and speed across the world’s datacenters and the communication networks that connects them. Manufacturers around the world are increasingly using advanced laser based techniques. Global consumer electronic leaders looked to laser based 3D sensing capabilities to next-generation applications. We believe we are well positioned with our new products, customer relationships designed wins and our ability to execute. I will now hand it over to Aaron for more details on our financial results and our guidance for the second fiscal quarter 2017.

Thank you, Alan. Net revenue for the first quarter was $258.1 million and exceeded the high end of guidance. First quarter revenue increased 7% sequentially and 21% compared with the same last year. GAAP gross margin was 31.7% and decreased 120 basis points quarter-on-quarter. GAAP operating margin was 6.5% and GAAP diluted net loss per share was $0.06. GAAP diluted net loss per share includes $22.7 million non-cash expense related to the derivative liability associated with the conversion feature of Series A preferred stock. The liability amount adjusted [indiscernible] with increases in our stock price and a corresponding offset due to other expense within the GAAP income statement. Our first quarter non-GAAP gross margin was 34.2% and increased 10 basis points relative to the prior quarter. The sequential increase was driven by 20 basis point improvement in optical communications gross margin. As Alan highlighted, the supplier quality issue in the first quarter for our100G Datacom business negatively impacted revenue and gross margins. Also negatively impacting gross margin were inventory reserves associated with lower speed 10G Datacom products which will reach end of life soon. Non-GAAP operating margin for the first quarter was 12.7% and exceeded the upper end of our guidance range. Our operating margins expanded 110 basis points sequentially as gross profit dollars faster than operating expenses. Non-GAAP earnings per share $0.49 based on a fully diluted share count of 62.4 million and also exceeded the upper end of our guidance. These earnings include $200,000 of other income and $2.2 million of tax expense. Now for some additional detail. Optical communications revenue was $218.3 million, an increase of 9% over the prior quarter driven by 20.5 million or 14% increase in telecom revenue which is offset by a 2.8 million or 6% decrease in Datacom revenue and $600,000 or 7% decrease in industrial and consumer revenue. Optimal communications gross margin at 32.5% increased 20 basis points sequentially from higher volume and the mix of products. Commercial lasers revenue at $39.8 million, a decrease of $700,000 quarter-on-quarter. In the first quarter, fiber laser revenue increased 15% to a record $17.2 million. Commercial lasers gross margin at 43.2% was flat with the prior quarter. We had three customers that each contributed 10% or more of our first quarter revenue, which was consistent with last quarter. Operating expenses totaled $55.5 million, or 21.5% of revenue compared with last quarter at $54.4 million or 22.5% of revenue. R&D expense was $33.8 million and SG&A expense $21.7 million. Income tax expense was $2.2 million for the quarter and equated to an effective non-GAAP tax rate of 7%. As we go forward, we expect the non-GAAP tax rate to be in the range of 7% to 10%. Capital equipment additions were approximately $24 million in the first quarter. In addition to expanding capacity for telecom and Datacom products, we're also adding equipment to prepare for emerging 3D sensing applications. Our cash balance was $166.8 million at the end of the first quarter, an increase of $9.7 million over the fourth quarter of fiscal 2016. Now onto our guidance for the second quarter of fiscal 2017, noting that all projections are on a non-GAAP basis. We project net revenue for the second quarter to be in the range of $258 million to $270 million with operating margin in the range of 12.4% to 13.7% and earnings per share to be in the range of $0.47 to $0.55. From a segment perspective, we expect commercial laser revenue to be down in the second quarter due to seasonal weakness for micro-materials processing laser demand, and also timing of customer projects and product transition. We expect our optimal communications revenue to more than offset the decline for commercial lasers. Also as we continue to invest in new products, our OpEx could trend up a bit to meet the timing and needs of our customers. Now, I will turn the call back over to Chris to begin the Q&A session.

Thank you, Aaron. I would like to ask everyone to limit the discussion to one question and one follow-up. Vince, let’s begin the question-and-answer session.

Thank you, sir. [Operator Instructions] Our first question is from Alex Henderson of Needham. Your line is open.

Thanks guys. Let me just start off with a couple of clarification, because you left some stuff -- I don't know limp there a little bit. The charge -- or the cost of revenues of $10 million in the quarter was that resolved before the end of the quarter or was that resolved after the end of the quarter? And if it was after the end of the quarter, is there a similar dividend or some portion of dividend in the current quarter as a result of the resolution timing?

Yes, Alex, it didn’t get resolved during the quarter. I think we determined root cause with the supplier and corrected action was implanted, but was improved Alex, until a couple of weeks ago. So, there's I guess the issue of terminology at divid [ph] in Q2, but nowhere near the size of what we -- what our impact was in Q1. So, we're back to full production and ramping up today, so it was probably the first two plus weeks of impact where we had much volumes output than our capacity would have been able to do.

So, $2 million or $3 million kind of hit in the quarter -- this quarter?

It probably was more than that.

Okay. The second question--

Alex just keep in mind that we’ve been adding capacity, so that maybe $5 million of impact of lost revenue this quarter, but on a higher capacity base.

Right. Understand. The second one was you said -- just to give some clarification there was a charge in inventory for writing down the 10-gig stuff. Can you give us a scaling on that?

Yes. So, it was roughly 50 to 80 basis points in terms of impact of gross margin.

Okay. And so that non-recurring, right, it's not going to occur again this quarter?

That's correct.

Right. That's all in the prior quarter.

All in the prior quarter.

So, when we get those out of the way, if I could just ask a question on the business. So, the ROADM business obviously grew quite triplex [ph], up a 11% sequentially. I assume that tracking to capacity additions; can you give us some sense of what the trajectory on capacity additions will be over the next couple of quarters there? And have you seen any evidence of the qualification of the WSS card over at Finisar yet in the field?

Well, let me answer the first question. We're adding capacity. We added capacity last quarter. Our revenue is just below the peak level that we had 2011. So, as we predicted, we're getting back to that point of where we were in 2011. And as we really look at what's happening in China with the ROADM deployment, we'll be adding more capacity. But at this time, we're pretty happy with where we are and with this slight amount of additional capacity coming online this quarter I think it will really be up to what I learned on my trip to China in a few weeks as to when those deployments happen. So, we'll make further decisions at that point to add capacity. As for your second question about our competitor being qualified, I really -- our customers don't tell us, but from what I can tell from the pulls and demand, I'd say there's -- we still have the vast majority if not all of the demand.

Okay. I'll cede the floor. Thank you.

Thanks Alex.

Thank you. Our next question is from Michael Genovese of MKM Partners. Your line is open.

Great. Thanks a lot. Can you just repeat what you said about the commercial lasers, I mean I think it was a little bit weaker than I expected in the quarter, but also, did you say it would be sequentially down again in the second quarter?

Yes, hi Mike, this is Aaron. So, we did say it would be down a little bit here in the second quarter. Seasonally, not a great time for the [Indiscernible] demand.

I mean any -- besides just down, any other help quantifying how much?

So, it's probably going to be down 15% or so sequentially.

Got it. Okay. So, then if we sort of take that into account as well -- the Datacom, if I can ask more on that Datacom 100G issue, was that in the CFP2? Were you having some success last quarter? Was that the product that had the issue?

Unfortunately, it impacted many of our 100G including CFP24 and one of our QSFP28 products. So, it was quite impactful across the Board. We were able to bring forward in many cases, but at the end of the day, we weren’t able to continue in production with the parts that we had in the industry space [ph]. So, it would have brought issue of prominent components that [Indiscernible] many of our Datacom -- 100G Datacom products.

Right. Okay. So, I mean it seems like if anything is surprising here to investors it's probably that -- I mean the quarter looks pretty good, but uses the revenue guide maybe not quite as big as thought it would, but when we account for the impact -- the ongoing impact in Datacom. And the commercial lasers decline, I guess it makes the optical com guidance look better. And I guess my question to you is just on these major end markets of China, Datacom, and U.S. Metro, are you -- have you seen anything get weaker in the last month or two? Anything that you're seeing worrying you in any of those markets or do you feel just as good or better than before?

I feel really good about all of the markets, I think, mainly due to our position in the market. And so, -- if you look at China, our modulators and tunable lasers both hit record high for 100 gig components. So, we're doing quite well there. ROADMs, we have a very good share of spend in North America. And then I'd say on Datacom it was just super-unfortunate that we ran into this issue, but our mindset with our customer was we'd rather fix the problem and ship quality parts than ship something that would be at risk at field issue. So, we together made the decision to not ship that product and get it fixed and now it's fixed and I'd say that we'll be back up to our normal full capacity run rate by the early part of November.

Okay. Excellent. And then last quick one from me. On ROADMs are you back up to your all-time kind of cycle high that you were seeing before? And does that mean you'd be ahead of your expectations that you had previously said in December quarter?

We're just below -- a hair below, less than 10% below it. We certainly expected over the next several quarters we'll bust through that, especially as China comes online with ROADM deployments, gaining confidence when that happen.

Great. All right. Thanks a lot.

Thanks Mike.

Thank you. Our next question is from James Kisner of Jefferies. Your line is open.

Yes, thank you very much. I guess my first question I want to drilldown a little bit on 3D sensing comments, comments you made -- do you want to recall all the way, so I apologize you gave some of this detail, but your former system company was saying that pretty much all of the major phone OEMs would likely be looking at 3D sensing basically from the second half next year that would be ramping for many OEMs. I'm wondering that's the same view and could you kind of verify that kind of dollar content per phone opportunity that you think is coming from that for you?

I don't know we have a sister company, but--

The obvious one I'm talking about to be clear.

Okay. Little bit joking. I would say that the customers that we're working with are super-secretive and for us to talk about the dollar content per phone or other kind of device for augmented reality or automobile would be premature at this time and I would say there's a lot of activity going on. We're increasing our R&D spend. We're spending capital in anticipation of being successful and so I would say hold tight in the January earnings call, we'll give you a give better update at that time.

Okay. So, -- thank you for that. And just we've been hearing some rumblings that there has been some issues at the time switch looking for 100 gig, just wondering if you're seeing any evidence of that, does that create any risk for your perspective that the 100 gig QSFP28 ramp could be delayed, paused or slow?

Well, I think it has been delayed and I think it has been paused, which is I think from my perspective very good for us given that we had this challenge in the September, October timeframe with this component. So, I don't think we've lost any ground with our Hyperscale customers with respect to that. So, I think it’s a good thing. I don't think it's really even happen in this quarter in a meaningful way, so most of our Datacom 100 gig products are really client side of telecom network in the CFP2 and CFP4 format, although QSFP28 is picking up. It's not getting to that Hyperscale kind of volume this quarter that I would have expected three or four months ago. I would say that there is lots of talk and we're adding capacity in anticipation that that happens really in the March and June quarter and so from my perspective; it’s not a bad thing that it got delayed.

Maybe [Indiscernible] it's essentially resolved like it's not cause bottleneck for a 100 gig QSFP28 demand?

It is today I think. I think there's anticipation that that will get resolved and be off and running in the first half of next year. I would say as we said in the script, our 48 business -- Datacom business was up last quarter, which was somewhat of a surprise. But I'd say there's no indication that I have that the first half of next year won't be a transition to 100 gig in a major way.

Okay. Just lastly on the capacity constraints you're seeing with some of your suppliers, I mean are you getting the sense that there is a lot activity that these are going to be alleviated as your supply chain getting more aggressive and doing some of these -- like [Indiscernible] up here in the next couple of quarters, or just demand is still strong you can't -- you're not likely to catch up any time soon? Thanks.

So, I think we're working with these key suppliers. I think he surprises that get us, but we're working with everyone that's critical to the ramp that we're expecting put buffer inventory in front of our factories and be able to have the flexibility when our customer mix changes which entire situations when the mix changes it’s hard to up flex, but we are working to try to give those suppliers to increase their capacity and put BMI inventory in front of our factories. So I would say that we will have that taking care of as we get into big ramp in the Hyperscale 100 gigs.

Thank you very much.

Thanks Dan.

Thank you. Our next question is from Troy Jensen of Piper Jaffray. Your line is open.

Thank you, guys. And the nice quarter, gentlemen.

Thanks, Troy.

Just back on to -- seems like everybody is uptick tear, if I’m going to assume this is a second half opportunity. Should we think that there is going to be pre-production volume hitting in the June timeframe, June quarter timeframe?

Troy, I really would hesitate to give you guidance on that for multiple reasons. One is customer; customers don’t want us to do that. And then, number two, it could flip and/or could pull in and I think what we’re doing is fully investing building dedicated teams buying capacity in capital and anticipation of it happen and if and when it does happen we’ll be ready. So I wouldn’t -- it would be premature for me to tell you that there is major predeceasing in the June quarter.

Alright, understood.

Yes.

I’ve understood, Alan. That’s fine. Could you also just give us an update on the ACO? I think pre-assume we thought kind of shipping or maybe shipping samples at the end of the year?

Yes. I would say, first of all, I think we’re making tremendous progress with the single chip solution at the wafer level and device level so we are very pleased with that. We’re getting units. We are making units on our production line in our fabs and the CMs and so. I think from that perspective we’re really happy with that. I think we still will be giving data samples this quarter and early next year will be in production and I think from my perspective the decision that we made to do the single chip solution to provide a cost advantage is still the right decision. So I’m pretty happy with where we are. I think that said just another data point around the components of 100 gig are 100 gig modulators and tunable lasers last quarter grew approximately 20% and we expect that to grow again this quarter. So I think both have markets to address and I think we’re going to continue to see to speak components grow until ACO market and ACO product cost come down to the point where I think our single chip solution can get it.

All right. Last question for me and I’ll see the floor. Can you just give us maybe some really thoughts on pricing assuming you’ve probably started some dialogue with customers on with the [indiscernible] is going to look like out for next year?

I don’t think we gave the data point for last quarter, but our average selling price last quarter was down about 2% and typically that quarter is about 3.5% if you look back over the last few year. So we’re starting to see the impact of better pricing reduction if you will. And we are having discussions in settling agreements now because customers want to make sure that they have the capacity allocated to them. So I would say a better pricing environment and we’re still going to have to give some pricing but I think it’s going to be better than it has been over the last several years.

Alright. Thanks gentlemen. Keep up the good work.

Thanks, Troy.

Thank you. And our next question is from Simon Leopold, Raymond James. Your line is open.

Great. Thank you very much. Couple of things I wanted to get into. One, Alan, you did mention you’re visiting China and you’ll probably gather little bit more intelligence and hopefully update us when you can. But in regards to the china ROADM opportunity, one of the things that we’ve heard is that the operators there are likely to deploy more traditional ROADMs rather than a CDC or TrueFlex form factor. I wanted to hear your perspective on that possibility and also to understand what would be the implications of the operators opting for more traditional rather than a next-gen ROADM form factor?

Yes. There have been trials of both the traditional won by 9s and they’re calling them flex lights. So they don’t have the full flex, TrueFlex capability, but certainly are TrueFlex ROADM meets the needs of that TrueFlex light. But there are also networks that are been deployed with our 21x20 technology whether that CDC or CD architectures yet to be determined I think. So I think we’re positioned well for both. I think certainly on the 21x20 there is a whole lot less competitions 1x9, but we’re cost effective at the kind of volumes we have to compete effectively with everybody on 1x9 products and we have next generation 1x9 low cost edge ROADMs that should address the cost points that rest of the world is looking for including China. So I’m very happy with our position as the ROADM start getting deployed in China.

And do you have an expectation or thought about which way they are leaning at this juncture?

I think there is going to be both being deployed and I think -- I would think that overtime, one of the things about the China carriers is that they look at the North America networks and say we don’t want just be good enough. We want to be as good or best of class in the networks. And so they’re trying everything to shift, assess, they can to the CDC kind of network. And the question in my mind is how fast can they make that transition and will the 1x9 suites some of the networks and some of the metro areas versus, the more TrueFlex type of architectures. So I think that there is room for both and I think we’re positioned well for both.

Great. And then in terms of the developed market trends, we get to sense that long-haul is probably slowing and maybe slowing at a somewhat faster pace than we thought 6 months ago and metro is really just beginning. Could you help us understand the implications for your business? Is there a risk of a pause in the telco related transmission spending, so non-ROADM related spending if you shift from long-haul oriented to metro oriented spending? How do you see that playing out over the next couple of quarters? Thanks.

Yes, well, I think from our perspective we don’t really care if its metro deployment from a transmission standpoint or a long haul. We have different varieties of modulators and tunable lasers they go both into the long haul as well as the metro markets. And so from our perspective, as long haul goes down metro picks up, that’s okay with us we shift similar types of products. So we address both marketplaces. I would say that you’re right that it does look like the spending from many of the carriers are moving from the long-haul core network out to the metro and that is where the ROADM count is high, the transmission ports are high and 10 gig tunable are high. That’s the product today we are on allocation that we’re trying to address. So either way, for us is fine. I do think you’re right as far as where the carriers are standing today; it’s really more shifted to the metro. And I would say that the metro is in the very, very early stages. There has been a few cities less than a handful of cities that have been deployed and so I think we’re really in the early stages there.

Great. And then, one last one from me please. Six months ago when we talked about the development of the QSFP28 market, the optics inside the data center. There is a lot of arguments and debates in the industry about what price points would look like at the end of this year at the end of 2016 and what’s your current view on what the pricing environment looks like versus what you’ve thought, it might look like six months ago. Thank you.

Yes, I don’t think it’s changed much. I mean I think we haven’t been lower in prices just because of capacity limitations and quite frankly CFP2 or CFP4 at higher ASPs is a better deal for us. So we haven’t seen a lot of change in expectations with regard to pricing. At the same time, we’ve been developing next generation QSFP28 to address that market should it continue the under pressure in the future. So I think we’ll be ready for it if and when it comes. I do think so that as the transition happens in the early part of next year, there is going to be a worldwide shortage of QSFP28 and so I hope that the pricing is rational at that time.

Thank you for taking my questions.

Thanks Simon.

Thank you. Our next question is from Doug Clark of Goldman Sachs. Your line is open.

Great. Thank you for taking my question. Want to come back to some of the comments that you made on ROADM capacity in particular. I want to make sure I understood it correctly and that. It sounds like you’re actually pausing capacity expansion on ROADMs until you get a better handle on what China demand looks like. Is that indeed true and offset assumption does that mean kind of ROADM should stay at these while elevated levels somewhat flat?

I think what I said with we’re very close to the peak level we were five years ago and that we have committed to capital that’s coming online and came online last quarter, coming online this quarter, but that I think we’re satisfied until we see either signals that instead of two cities in a month or its going to be five cities in a month in the future. And then the China would be incremental capacity that we would need to pull the trigger on, but at the same time we’re working on productivity improvements, yield improvements to be able to get more out of the capital that we have online today. So I would expect that 10% productivity improvement over the next few years without capital adds which has come as a result of continuing down the learning curve.

Got it. Okay, yes, that makes sense. That’s helpful as well. Looking at the December quarter guide as well, in terms of operating margins the midpoint is going to flat to up sequentially on higher revenues. Can you talk a little bit about kind of delta between gross margin expectations for next quarter? And you also kind of have talked about a few different areas of OpEx investment. It’s remained fairly contained in the past three quarters. I mean what levels do you think we’re going to get to in terms of either obsolete dollars or intensity here?

Hi Doug, this is Aaron. So, in terms of the Q1 results, we did 12.7% operating margin. OpEx was roughly 21.5%. We did see some good operating leverage. As we go forward, we mentioned we're going to be continuing to invest in new products. As mentioned, we have 3D sensing as well as other programs inside of Op Con and the lasers that we're continuously investing. So, OpEx is going to tick-up a little bit in the December quarter and we think gross margins will as well, okay. In terms of the midpoint of our guide over 13% compared to where we've been the last couple of quarters and even four, five quarters ago. We think it's a huge improvement to what we have been. In terms of the longer term model, we don't guide long-term, but we don't believe we're at the end of the state here in terms of operating margins by any stretch of the imagination. We're still targeting 14% to 15% operating margins as we go out six to eight quarters.

Okay. That's helpful. Thanks very much. Actually one additional follow-up if I can. There have been a number of kind of mix the data point shows on Hyperscale data center trends, in particular, some kind of the system ecosystem, it sounds like you are not necessarily seeing that given customer diversification and underlying demand for either 40 or 100 gig. Is that a fair characterization that you're not seeing downward pressure or budget freezes?

Well, I think -- if you look at historically we've had very little exposure in 40 gig in the Hyperscale data center. So, most of our 40 gig Datacom stuff is going to our NIM customers and as client-side components or going into NIM then sell into enterprise. So, I think from that perspective, our exposure to Hyperscale has been very limited over the last couple of year. So, everything as we transition to 100 gig inside the data center is incremental to us. It doesn't cannibalize from fire product. So, I think as I said earlier, I think the 100 gig has -- the transition has slipped from what thought was going to be now into the first half of next year and everything from that perspective would be incremental to our available market and I think we're positioning well. So, I do think there has been a pause, and whether that's because of a [Indiscernible] chip or budget freezes or what have you, it's not prepared to meet, but I would say that every expectation I have first half of next year is when the transition really happen.

Great. Thanks very much.

Thanks Doug.

Thank you. Our next question is from Rod Hall with JPMorgan. Your line is open.

Hey guys. Thanks for taking the question. I guess I want to start on telecom, the total revenue number it looks like is about $21 million and your ROADM number on your 17% growth I guess up about 9, so I believe $12 million of increase from non-ROADM business and I just wondered is that all multi-Metro increasing or can you give us just some color within that non-ROADM increase and what's going on there? And then I also wanted to talk about the -- whenever this Datacom ramp, the QSFP28 ramp happens, I'd be curious to know if you'd handicap it Alan more in Q1 or more in Q2, which of those two is more likely in your mind for a significant ramp? But beyond that you think there's sustainability in that demand, or do you think we'd see a big pulse of demand and then fall off again. So, curious what you think there. And then lastly, in 3D sensing, people going around and saying [Indiscernible] a lot of competition to that and the margins therefore would be unsustainable. Can you just comment on that? I mean do you -- I assume you disagree with that, but why do you disagree, is it difficult to make bit [ph] holes that some of the other competitors not make the same quality product, et cetera? Thanks.

Okay. Thanks Rod. Well, let me take a shot at the non-ROADM telecom growth last quarter. I'd say we did see strength in the 100G components, both modulators and tuneable lasers and we saw a rebound in our submarine revenue in the quarter. So, those are probably the two major drivers outside of ROADM. Did I miss anything?

That's basically it.

Okay. As far as QSFP28 ramp timing, I would say probably count on second half -- second quarter of calendar 2017, but that we would expect some initial ramp up in the first quarter to the QSFP28. I would say that it's probably sustainable. When we were on the front end of the 40 gig transition in Hyperscale where we had exposure to any large Hyperscale customer and it's in our Form-10. We saw that business sustain for a year plus and the only reasons that didn’t sustain longer than that was we were relying on an outside source for our optical assemblies. In the 100G space, we're all 100% vertically integrated. We think we'll have a competitive advantage from a cost standpoint that we would expect that to go on for multiple years and so the 400 or 200 gig transition takes place. And last question on competition on 3D sensing. We have competition in everything we do. I think our advantage is that we've been in 3D sensing business for eight or nine years. We understand the consumer’s side of the market and we understand high volume manufacturing for that stage. And we have a track record of extremely high reliability of those products and data to back that up. So I think that gives us a competitive advantage from the other guys who make claims they have a lot of capability and digitals as well as [indiscernible].

Okay. I just wanted -- on your answer on the first question Alan to come back to that -- are you -- with regards to metro has anything changed in terms of your thinking on the acceleration of the deployments there? Can you just kind of say – it’s only a couple of cities now winner stands as well, but what do we see the real ramp in that to multiple cities accelerating, you see that in Q1 recently this quarter and what do you think happening on.

Yes, I would say that I had expectations probably that it would have been even more aggressively deployed than what we’re seeing both from second half of calendar 16 as well as what we’re being told with the first half of 17, but that I think is a result of really stretching out the deployment if you recall a last couple of calls that we’ve been saying -- maybe 2.5 to three year deployment. I think it’s probably more or like four or plus year deployment. And I think that’s a good thing for us, by the way so we don’t have to continue to spend so much capital to meet the ramp of the North American metro and China combined. So I think that’s not a bad thing for us, but I would say it’s probably slower than what we had hope for and what we had expected.

Okay. Thank you.

Thanks, Rod.

Thanks. Your next question is from Patrick Newton of Stifel. Your line is open.

Alan and Aaron, thank you for taking my questions. I guess on the electrical component issue, is that across CFP24 and QSFP28 part families. And then I guess given the full capacity resumption in the November timeframe. Can you help us understand what amount of revenues left on the table relative to the 10 million you set it for September quarter?

Yes, so it was on CFP2, CFP4 and one of our QSFP28 versions are [indiscernible] didn’t used this component so that didn’t have an issue on our PSM4. I would say we are ramping today. We’re very happy with the speed and scale which we got back into volume production at our contract manufacturer and the speed and scale which the supplier who had the problem has been able to fix the problem and ramp up. I think we underutilized probably the first three weeks of this quarter, but I would say that probably by next week we’ll be in full scale utilization of our capacity. So to compare the 10 million miss from last quarter is probably at 5 million miss from our full utilization of capacity this quarter. We’re continuing to work on productivity improvements and yields improvement to lessen that overtime.

And then how big was the 100G business in Datacom in the September quarter? And then what percentage of ROADMs was TrueFlex?

100G Datacom was roughly $23 million.

It should have been 33.

Should have been 33, 10 million lite, TrueFlex would have been about 80% of the total ROADM number.

Great. And then just last one from me on the laser business and kind of 15% sequential downtick your forecast in December. Can you help us understand the mix between your fiber business and non-fiber business?

I think our expectation is both go down.

Relatively similarly sized?

I would say so, yes.

Great. Thank you for taking my questions. Good luck.

Thanks, Patrick.

Thank you. Our next question is from Meta Marshall of Morgan Stanley. Your line is open.

Great. Thank you. Back to the downtick in laser demand, you guys mentioned that it was due to kind of the materials processing market been down, realizing that you don’t guide more than one quarter up. Does that something you think would be one quarter disruption this year on budgets are tight or is that something you feel like could continue multiple quarters. And then, second, on the fab consolidation, is the timing of that still second half 17 or due to kind of capacity constraints and just kind of overall attention focus will you need to move that little bit later. Thanks.

Okay, thanks, Meta. So in terms of the laser demand, we do see an impact here in near term in Q2. Our laser business has been relatively lumpy, but we don’t believe it’s going to be at this range overtime I think over the next couple of quarters after the December quarter. It just start get back to the level where we were before. Likely I’d mentioned there is some customer projects and product transition timing and things like that that are also impacting it other than just the seasonality.

Yes, I think just to add on top of that SAAR [ph] announcement earlier this week, we announced 3 kilowatt and 9 kilowatt fiber laser engine. Those products go in production in Q1 and I think that will drive pickup in revenue from a fiber laser business.

Second question in terms of the fab consolidation and so we had mentioned in the past that middle of the second -- first half of the year, we should be consolidating and we're still on track for that. So, by the second half of the calendar 2017, we should see accretion to gross margin of roughly 70 to 100 basis points.

Great. Thank you, guys.

Thank you. Our next question is from Richard Shannon of Craig-Hallum. Your line is open.

Hi guys. Thanks for taking my questions as well. Maybe a question on 100 gig Datacom, you mentioned reference to past questions about the delay or the pickup in that business relative to your expectations from a quarter ago and talking about switch delays and perhaps other spending pushouts or whatever. Alan I'm curious whether you're seeing any discussion in the market about whether 100 gig NRZ is really the optical speed platform to be standardizing, could we see other ones out there like PAM4 based 200 gig or something else and could that be part of the reason why there's maybe a pushout in 100 gig?

Yes, I don't think that's the reason for it. I don't think there's a [Indiscernible] of 200 gig, PAM4 or 400 gig PAM4 for quite some time. Chris you want to add to that?

Yes, I mean it think that we're seeing and what in terms of delay has nothing to do with something else is better coming along. It's more of that -- one the industry is sold out heavily on 100 gig optics already. And then obviously as people have been asking on this call, there may be other challenges in the 100 gig ecosystem with regard to switching silicon or other parts that our datacenter customers need to build their entire network. But I think it's that coming together if all of those pieces now has shifted out in time, not competition coming from 200 or 400 gig in the future.

Okay. Appreciate that perspective. A follow-up question from me on the topic of 3D sensing. You've characterized the opportunity is not just in the mobile space, but also in other areas like automotive. Curious whether the across the gambit of these applications, what kind of laser technologies are being contemplated. Seem like mobile app is mostly Vixel, -- whether -- curious whether these other applications would -- might contemplate other users or more focused on Vixel there?

Yes. It’s a combination of both Vixel and [Indiscernible]. Most of our volume today has [Indiscernible], but as we look forward to automobiles, there's going to be many, many sensors in any automobile and some may be Vixel-based, some maybe [Indiscernible] base depending on what the application is. And I'd say if you look around the computers that we're in today, those [Indiscernible], but a lot of have been in Vixel based 3D sensing. So, I think there's a market for both depending on the application. [Indiscernible] to be able to detect as well as the power consumption, I think that's going to the decision. But it's really by application the customer simply decides best technology in application.

Okay. And Alan does Lumentum's differentiation between what type of laser you're offering change materially. Do you feel like it's very strong in whatever laser technology you're supplying?

I think we have strength in both. We've been in the Vixel business for a long time; we've been in the edge business for a long time. And just a fact when we show potential new customers, they give the labiality and the testing that we've done on our 3D sensing really is a result of the same team that's working on our submarine product that have been worked for 20 years at the bottom of the ocean. I mean these guys are super-smart and know how to test and design a technology and a product to meet the needs of consumer electronics or automobile industry or submarines cables. And so I think we have a strong competitive advantage because of history of both 3D sensing and submarine pumps.

Okay, that's great perspective. Thanks for that Alan. That's all from me guys. Thank you.

Thank you. There's no more questions in queue at this time. I'd like to turn the call back to Mr. Lowe for any closing remarks.